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Chinese Investments in South America

Oct 11 , 2013

As Europe is stuck in recession and growth in America is less than robust, the Chinese are looking for additional markets for investments.  Chinese investment also is driven by the need for additional resources like oil, natural gas, and metals.  (The need for additional farmland has driven the Chinese to purchase an incredible 5% of the Ukraine.)  

In June of 2012, Chinese President Xi Jinping toured Latin America and the Caribbean. He told the press, “The Latin America and Caribbean region is one of the most dynamic and promising regions in the world.” The President added that the visit will deepen China’s relations with the region. 

Here we will discuss some Chinese investments in South American. 

Chile is an attractive market and Chinese investment is small, but is growing there.   Chile’s Foreign Investment Committee has hired the Shanghai-based investment banking firm E.J. McKay to attract Chinese investors to attend the International Investment Forum Chile 2014 to be held in three different cities in Chile on January 13-16 of 2014. 

Among the Chinese companies already operating in Chile are the mining company Jia He Wei Ye, Golden Resource, Sky Solar, and the National Development Bank of China

The cost of electricity is a concern in Chile.  The country has practically no oil, natural gas, or coal to power the thermoelectric plants. Mining companies consume vast amounts of electricity adding to the demand (Copper is Chile’s principal export.).  In the northern deserts, the situation is made worse because of the lack of rain.  Some mining companies are making their own freshwater from seawater at great costs. 

Solar power is one option for additional electricity for towns and communities, although the output from even the largest solar operations is nowhere close to that from average hydroelectric or thermoelectric plant.  

Last year, China’s Ambassador to Chile was on hand to break ground on a solar power project in the northern city of Arica.  The project, launched by Hong Kong based Sky Solar, was the first solar project by a Chinese company in Chile.  The company also recently obtained environment approval to operate another plant, a 15 MW facility with 75,600 solar panels spread across 42 hectares of desert.

The Xinhua News Agency says that Chile signed a free trade agreement with China in 2007 exempting 97% of good from import tariffs.  It was the first Latin American nation to do so. 

China Daily says that as of July 2012, Chinese investment in Chile was $94.7 million and is increasing “due to [the] Chilean government’s stimulus measures.”  

Argentina, as is usually the case, is a different story altogether.  The country is trying to keep its currency from collapsing for the second time in 15 years, so it has limited imports and severely restricted its citizens from selling pesos to buy dollars.  Argentinians travelling abroad must pay a steep fee for using dollar-denominated credit cards.  Goods they purchase abroad are subject to a heavy leavy at the border when they return home. 

The government there also wants to promote domestic production of any kind.  It recently seized the assets of the Spanish oil company Repsol.  In a move that was just overturned by the courts in Argentina, the country seized a maintenance hangar from the Chilean airline, LAN effectively blocking that company from operating there.  There is no doubt where Argentina stands on this issue:  The official they sent to negotiate the issue is the finance minister who also orchestrated the nationalization of Repsol. 

The Chinese manufacturer Lenovo did not recoil from the difficulty of operating in Argentina.  Instead it set up shop in the tax-free zone of Tierra del Fuego together with the Argentine company Newsan to build laptops, tablets, and desktop PCs. 

Chinalco, the Aluminum Corporation of China, has operations in Peru.  Like Chile, Peru has copper and other metals resources including gold.  The company is expanded its open-pit copper mine Toromocho, which it says already is one of the largest in the world.    Like similar mines in Chile, is Toromocho located at extreme altitudes that make it difficult for some people to work there. 

Brazil, like India, has fallen off its track to become an economic powerhouse to propel growth elsewhere in the world.  The country has seen massive protests recently that has cast doubt on its ability to successfully pull off both the Summer Olympics and the World Cup football (soccer) matches in 2016 without major incidents.   President Rousseff’s popularity has fallen to an all-time low.  Still, the country was and will continue to be a magnet for foreign investment.  Like other nations in South America, it is resource-rich. 

The China Post said that in 2011 China passed the United States as Brazil’s largest foreign investor. 

Brazil is falling back on old protectionist ways slightly and trying to deter the import of vehicles into the country to prop up its domestic production.  This has brought howls of complaint from other countries who say that infringes on existing trade agreements. 

The Chinese car manufacturers JAC and Chery are building plants in Brazil.  Neither facility is open yet.  Chery plans to build 150,000 cars per year.  JAC will build 100,000.  Brazil is the world’s fourth largest market for vehicles. 

Colombia is a resource-rich country that in spite of what Hollywood movies show enjoys relative peace and stability, at least in the cities.  (The jungles are still dangerous in certain areas.)  President Santos has kicked off peace talks with the FARC guerillas in Havana, Cuba with the goal of ending the 60-year old civil war there.  Genuine progress has been made. 

China Petroleum and Chemical Corporation (Sinopec) partnered with the Indian Company ONGC to buy 50% of the Omimex de Colombia in 2006. Oil, of course has to be drilled where it is located, jungle or not.  In 2011, the Colombian military rescued four Chinese workers who had been kidnapped by FARC guerillas.  The were working for Emerald Energy, which is a subsidiary of the Chinese company Sinochem.  Still, the energy minister told Reuters that Colombia wants more foreign investors to develop copper and gold deposits there.  (Colombia is the world’s largest producer of emeralds by far.  They are not seeking foreign assistance with that precious gem.) 

Ecuador, another oil and mineral-rich nation, is not exactly a paradigm of political stability and security either.  The country is populated with gated-communities, armed guards, and petty corruption that makes daily life less than convenient.  A new law makes it easy for individuals and businesses to sue newspaper reporters for libel.  The publisher of the country’s largest newspaper, La Hora, fled to Panama after President Correa threatened him with arrest and a multi-million dollar fine.  The publisher came back when Correa yielded to international pressure. 

The Chinese backed mining company ECSA signed a $1.4 billion agreement with Ecuador to move ahead with its El Mirador copper mine.  Ecuador has lots of oil but few mining operations.  The agreement between the company and the country calls for significant royalty payments (52%) to the government.  Such is the cost of doing business in the region where the local population does not want to give away its mineral riches to foreigners.  Mexico’s new oil-policy envisions a similar kind of arrangement where foreign companies are allowed to operate in the country but not have outright ownership of the oil reserves there. 

Bolivia, like Chile, has lithium that Chinese companies need to make batteries.  The country is not racked with violence and there is no guerilla insurgency there.  Instead Bolivia’s problem is its poverty and lack of access to the sea (it lost that in a war with Chile 100 years ago).  Its international border crossings with Chile in the rainy winter become mud-slick quagmires.  (In Chile, snowfall can close the border with Argentina for days at a time.) 

CITIC Guoan Group has signed an agreement to investigate lithium and potassium reserves in the Bolivia’s giant salt flats.  (Bolivia’s Salar de Uyuni salt flat at 10,582 square kilometers is the world’s largest.  It is a major tourist draw.  There is even a hotel there made entirely of salt.) 

China is indeed looking to South America as a place for foreign investment and as a means to shore up its reserves of metals and sell more of its cars, computers, and other products overcoming tariffs and protectionist policies in certain regions of South America by locating inside the countries there.  Chile is by far the most stable country region, the most open economy, and has some of the world’s safest banks.  Most countries in the region, like Peru, have no significant security issues except in certain small areas.  No politician is going to rip from the ground Argentina’s vast acreage of corn, soybeans, and beef–although farmers there have protested restrictions on agricultural exports.  Colombia too is much closer to putting its security issues behind it.  Brazil, like Argentina, has vast areas suitable to farming and lots of oil and natural gas.  China will no doubt remain engaged and increase its investments in the region. 

Walker Rowe is Publisher at Southern Pacific Review. He lives in Santiago, Chile.

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